Learsy: Boone Pickens is Wrong. We Don’t Have the Cheapest Oil and Gas

Raymond J. Learsy

Thursday, 17 Nov 2011 | 11:50 AM ETCNBC.com

SHARES

Henrik Weis | Lifesize | Getty Images

Wednesday’s quoted price for Brent Crude (the bench mark generally used worldwide) is $117.70/barrel, while WTI Crude (the benchmark used in the U.S.) delivered at Cushing Oklahoma is $102/bbl.

A difference of $15.50 per barrel.

According to Pickens on Wednesday’s Morning Call on CNBC segmentthe price for natural gas in the Far East is $16/mmbtu, in Europe $13/mmbtu while the price of natural gas as quoted for natural gas in the U.S. is under $4/ mmbtu.

In both cases the difference in price is significant, with markets in the U.S. having a distinct advantage. But it is the markets where the U.S. enjoys the advantage and not necessarily in the cost of oil/gas. Saudi Arabia can pump oil for less than $1.50 a barrel and Qatar the cost of natural gas can be assumed at levels of cost comparable to that in the U.S., perhaps less.

It is the markets that are more efficient in the U.S. resulting in lower prices. By more efficient one might say less influenced, but not free, of market speculation if not manipulation. The problem was clearly set forth by Rex Tillerson, Chairman and CEO of Exxon Mobil , in his testimony before the Senate Finance Committee in May of this year stating that he found the price of oil higher by $30/$40 barrel because of speculation. It needs raise the question what role if any do Saudi Arabia/OPEC, Russia play in determining the price Brent Crude, not to speak of speculators determining the price of WTI.

As to the market price of natural gas, the price of gas in the U.S. of $3.50 mmbtu is clearly the price determination most reflective of real supply and demand. First, American natural gas is a price determined exclusively as a domestic commodity. Here there are no opaque offshore commodity exchanges trading U.S. produced natural gas giving our oversight agencies such as the CFTC, Federal Trade Commission and Justice Department far more direct impact on the workings of the natural gas market.

T. Boone on Energy Independence

T. Boone Pickens discusses his outlook for energy and how easy it is for the United States to develop its own energy and the benefits of getting off of OPEC's oil.

It raises the question, given a similar set of trading parameters for oil, what would a true price for oil be in the United States. Consider the following, at $3.50 mmbtu the energy equivalent of a barrel of crude has an energy equivalency of approximately ‘6’. Therefore on an energy equivalency basis the price of oil would be $3.50 x 6 or $21 a barrel.

No, don’t sell those oil shares. Much, much has to happen before we are there. But something to contemplate while considering Mr. Picken’s moon shot future oil price predictions.

Raymond J. Learsy is a member of the Woodrow Wilson International Center for Scholars. His informed analysis of the international oil trade and its global impact has been featured in The New York Times, the Pipeline & Gas Journal, National Review Online, The Huffington Post and on CNBC. A graduate of the Wharton School, Learsy is also the author of "Over a Barrel: Breaking Oil’s Grip on Our Future."